Small Saving, Big Levy

The Budget 2013-14, presented by Finance Minister P Chidambaram on the last day of February, dashed taxpayers' hopes of more exemptions and proposed quite a few changes that may impact your finances.

INCOME TAX

The Budget left tax slabs and tax rates unchanged but proposes a Rs 2,000 tax credit to those whose taxable income is up to Rs 5 lakh. The credit, given to those in the lowest tax bracket, increases their tax exemption limit from Rs 2 lakh to Rs 2.2 lakh. "1.8 crore taxpayers are expected to benefit to the value of Rs 3,600 crore," the finance minister said in his Budget speech.

The Budget has also not changed the tax rates for senior citizens (60-80 years) and very senior citizens (80 years and above). So, all men, women and senior citizens with taxable income of less than Rs 5 lakh will save Rs 2,000 in 2013-14. The rates for those in higher income brackets have not been changed, except for those with taxable income of more than Rs 1 crore. The 3 per cent education cess on the total tax liability continues.

TAX ON SUPER RICH

The government has announced a 10 per cent tax surcharge on those with taxable income of more than Rs 1 crore. With this, their effective tax rate will be around 33 per cent. So a person with taxable income of Rs 1.1 crore will now have to pay Rs 35,46,290 as tax as against Rs 32,23,900 earlier. (Education cess of 3 per cent is calculated on the tax amount inclusive of the surcharge.)

According to the Budget speech, 42,800 individual taxpayers have filed returns with taxable income of more than Rs 1 crore per year. The surcharge will also apply to Hindu Undivided Families.

Companies will also have to pay a higher surcharge. Indian companies with taxable income of more than Rs 10 crore will have to pay a surcharge of 10 per cent as against 5 per cent at present. Foreign companies will have to pay a 5 per cent surcharge as against 2 per cent at present if their taxable income exceeds Rs 10 crore.

HOME LOANS

If you are looking to buy your first house, it's a good time to do so. The government has tried to encourage home ownership by offering an additional tax deduction for home loans. Taxpayers buying their first house in 2013-14, financed by a home loan up to Rs 25 lakh, will get an additional Rs 1 lakh deduction for interest payment. This is in addition to the existing limit of Rs 1.5 lakh for self-occupied homes under Section 24 of the Income Tax Act.

If an eligible home buyer's total interest on home loan during 2013-14 is less than Rs 2.5 lakh, the unused component of the Rs 1 lakh deduction can be rolled over and claimed in the next financial year (2014-15).

"For a person taking a home loan of Rs 25 lakh, assuming he/she is eligible for the entire tax benefit on interest payment of Rs 2.5 lakh, the entire amount (assuming the interest rate is 10 per cent) will be available for the benefit. Therefore, the effective rate for the loan will come down to around 6 per cent," says Renu Sud Karnad, managing director, HDFC, India's biggest housing finance company.

Given the high property prices in metros, the main beneficiaries of this move will be those buying affordable homes near big cities or in smaller locations.

"The impact of this (new tax deduction) will be largely in Tier-II towns as compared to metro cities. Further, during the last couple of years, the growth rate for HDFC in volume terms has been higher from Tier-II towns as compared to the metros. Hence, it is a very positive step, though, for the time being, the additional Rs 1 lakh deduction is just for a year," Karnad says.

EXPENSIVE LUXURY HOUSES

In line with the government's plan to tax the rich, the Budget seeks to increase the service tax on highend houses. Houses with a carpet area of 2,000 square feet or valued at Rs 1 crore or more have been classified as high-end. The rate of abatement for service tax on such homes has been reduced from 75 per cent to 70 per cent as these have a 'higher component of service'.

The rate of abatement or deduction is used to calculate the service tax to be paid by the developer. The reduction in abatement to 70 per cent means the service tax will be calculated on 30 per cent of the price of high-end residential units. The developers will pass on the additional burden to buyers.

Real estate analysts expect the move to push up prices of under-construction as well as ready high-end and luxury properties in major cities. However, the increase will affect a small segment of the market, primarily in the metros.

PROPERTY TDS

Another move that will impact the real estate market is the introduction of 1 per cent tax deducted at source (TDS) for property transactions where the sale amount is more than Rs 50 lakh. The move is aimed at improving the reporting of such transactions and taxation of capital gains from properties. This will apply from June 1.

"While this is a laudable initiative (to curb black money and bring more transparency) and will help the government shore up revenues, it will not ensure complete transparency as some sellers may still undervalue properties to avoid the tax or lower the burden," says Sanjay Dutt, executive managing director, South Asia, Cushman and Wakefield, a global real estate consultancy.

Some analysts expect a rush for property deals before June 1.

The move may also increase property prices. A similar proposal in Budget 2012-13 was dropped. The government had then announced a 1 per cent tax if the amount exceeded Rs 50 lakh in urban areas and Rs 20 lakh in other areas.

EQUITY SCHEME

In order to encourage participation of retail investors in equity markets, the government has liberalised the Rajiv Gandhi Equity Savings Scheme (RGESS), which was introduced in Budget 2012-13.

Now, first-time equity investors can invest up to Rs 50,000 in shares and mutual funds in three years and claim a deduction of 50 per cent of the investment. Earlier, only investments in the first year were eligible for deduction.

In addition, the income limit for eligibility has been increased from Rs 10 lakh to Rs 12 lakh. This means those in the highest tax bracket (30 per cent) can save around Rs 7,500 by taking the RGESS route.

Stock exchanges have been trying to create awareness about the scheme through seminars, direct interactions with investors and advertisement campaigns.

"This is the time of the year when taxpayers look for investing opportunities. We are confident that these initiatives will help investors understand the tax benefits of the RGESS," according to an official of the National Stock Exchange.

Despite the extension of the scheme to three years and increase in the income limit, industry players say the rules are too complicated for beginners.

The RGESS mandates a three-year lock-in. In the first year, the lock-in is absolute. From the second year, shares held under the scheme can be sold, provided the portfolio value does not fall below the amount for which deduction has been claimed or the value of the portfolio before the first sale transaction, whichever is less, for at least 270 days in a year during the lock-in period.

Some industry players had asked that the scheme be extended to all equity investors, including existing ones, within the prescribed income limit. Some had sought simplification of the scheme. However, RGESS-oriented mutual fund schemes should make it easier for investors to comply with the norms.

OTHER MEASURES

To make the tax system more efficient, the government plans to extend the refund banker system to tax refunds worth more than Rs 50,000. Under the scheme, tax refunds are credited to your bank account directly or through a cheque. The government also plans to make online filing of tax returns mandatory for those with taxable income above Rs 5 lakh. At present, e-filing is mandatory only for those with income of more than Rs 10 lakh.

There is good news for those contributing towards government (Union or state) schemes similar to the Central Government Health Scheme. The contributions will now be eligi ble for tax deduction under Section 80D of the Income Tax Act.

Though the government is discouraging gold imports and investments in the metal, it has made it easier to bring jewellery into the country. Now, women passengers can bring jewellery up to Rs 1 lakh without paying any duty. The duty-free limit for men has been increased to Rs 50,000. Hitherto, the duty-free allowance for gold, including finished jewellery, was Rs 10,000 for men and Rs 20,000 for women. This limit was fixed in 1991 when prices of gold were much lower than they are now.